Ask SmallBiz: Paying taxes when low on cash

March, 2010

Q. My small business has really slowed down, and I am worried that I will not have sufficient cash to pay all of the taxes I will owe. What can I do?

A. Your small business is facing the same situation as many others in Hawaii. Although cash may be tight, you do not want to ignore your tax obligations.

If you have employees, including yourself, you should continue making timely payroll tax deposits. The penalties for failing to pay your payroll taxes can be severe. In addition, any “responsible person” — a corporate officer or an employee — who willfully fails to pay withholding tax to the IRS is subject to a penalty equal to 100 percent of the tax. The penalty is the IRS’ way to ensure collection of the withheld taxes and is assessed when the tax cannot be collected from the business and results in a personal liability that cannot be discharged in bankruptcy.

If the income from your business is declining, your estimated tax liability may also be decreasing. The simplest way for a small corporation to calculate its estimated tax is to pay at least the same amount as the year before. But, in a year when your income will be less than the preceding year, it may be worth the extra effort to calculate your estimated tax based on the projected income for the current year on a quarterly basis if it will result in lower quarterly estimated tax payments.

In general, a corporation computes its first-quarter installment by computing taxable income for the first three months of the year and annualizing it over 12 months. The corporation will pay 25 percent of the tax liability based on the annualized income. The second-quarter installment can be the same amount as the first-quarter installment. The third-quarter installment is based on taxable income computed for the first six months and then annualized. The third-quarter installment should be equal to 75 percent of the tax liability on the annualized taxable income less the amounts already paid. The fourth-quarter installment is based on taxable income computed for the first nine months and then annualized. The fourth-quarter installment should equal to 100 percent of the tax liability on the annualized taxable income less the amounts already paid. If a corporation is expecting or hoping for increased income in the later part of its tax year, this method of paying estimated taxes helps to conserve cash until you have it.

Corporations that expect to extend the filing due date of their Form 1120 — U.S. Corporation Income Tax Return – may apply for a quick refund for overpayment of estimated taxes for last year. If you believe you have overpaid 2009 estimated taxes by at least 10 percent and you estimate the amount to be more than $500, you can use IRS Form 4466 – Corporation Application for Quick Refund of Overpayment of Estimated Tax to apply for a quick refund. The application must be filed by March 15, 2010, for the calendar year 2009. An overpayment is the excess of the estimated tax paid by the corporation over what the corporation expects its tax liability to be at the time the application is filed. Filing Form 4466 does not relieve you of having to file the income tax return by the extended due date, but it gets you cash back quicker.

Lastly, all businesses should remember that beginning with the January 2010 period, Hawaii general excise tax payments will be due on the 20th day of the month following the close of your reporting period. That’s a week and a half earlier than before. So if you are a monthly filer, your January Form G-45 and payment was due on Feb. 20, and your February payment will be due March 20.